Are you looking to buy a new home but are not sure where you’re going to get the financing?
As a homebuyer with a moderate income, you will likely gravitate towards mortgages offering the lowest possible interest rates. FHA home loans and USDA Loans are the two excellent options to consider. Either one can help you get a roof over your head with a few out-of-pocket costs and a lower rate of interest.
FHA loans and USDA loans are government-backed loans that help low and moderate-income earners achieve homeownership. The U.S Department of Agriculture creates USDA loans to help low-income families and farmers to become homeowners in rural areas. In contrast, FHA loans are backed by Federal Housing Administration and given by private mortgage lenders. These loans feature lower down payments, competitive interest rates, and flexible credit requirements. But one of the significant differences is that you can buy a home anywhere in Texas with an FHA loan in Texas. In contrast, USDA finances home only in rural or farmable areas.
Which one is right for you?
Well, the choice depends on your financial situation and long-term goal. Mortgage lenders can help you make the right choice. Let’s outline the key differences between the two loans for your better understanding.
Down Payment:
To get an FHA loan, you need to have a 3.5 percent down payment, whereas a USDA loan offers 100 percent financing. It means the minimum down payment is zero. However, FHA allows your down payment amount to be gifted by your parents or relative.
Income Limit:
When it comes to income eligibility for FHA and USDA loans, they both can help those with moderate income. But if your income is higher, FHA loans are not available. The income limits for USDA are based on total family income and location. USDA can help you get home if you have an income of up to 115 percent of your area’s median income, whereas there is no upper limit set for FHA loans.
Property Location:
USDA home loans in Texas require that homes being purchased must be in a rural or farmable area and have a not considered urban location. In simpler terms, USDA loan strictly focuses on rural areas while FHA loans have a broader jurisdiction and can help people buy homes in both rural and urban areas.
Loan Terms and Size:
There are several loan term options available for FHA and USDA loans. But the maximum loan term allowed by these two mortgages is 30 years. As long as the borrower has an appropriate debt-to-income ratio, there is no limit on Texas USDA loan size. USDA’s maximum debt-to-income ratio is limited to about 41% but has certain compensating factors such as a credit score of over 660 and stable employment. However, FHA loan size depends on the location and is limited to 115 percent of the area median price. Also, FHA has a more flexible debt-to-income ratio of 45% without any compensating factors.
Closing Costs:
Both USDA and FHA loan requires the borrower to pay for the loan’s closing costs such as appraisal fee, credit report, homeowners insurance, etc. Also, you can negotiate with the lender to cover up to 6% of the closing costs. However, as USDA loans offer 100% finance of the appraised home value, which can sometimes be higher than the purchase value, you have the option of using the excess amount towards paying the closing costs.
Property Type:
USDA only finances single-family homes such as rowhouses, townhouses, and condos. Also, the property should be your primary residence. USDA does not finance investment properties. FHA can help you finance a home of any kind, including single-family, condo, and property with up to four units. But one unit has to be your primary residence. For example, you can purchase a duplex, live in one-half of the property, and rent out the other half. Similar to USDA, FHA loans do not finance investment properties.
Interest Rate:
USDA loans carry a lower interest rate than FHA loans in Texas, and this difference can help homebuyers who have a tight budget. In addition, lower down payment and loan terms contribute to the difference in the rates of both these mortgages. For example, an FHA loan’s current interest rate hovers around 4.5 percent, whereas a USDA loan has an interest rate of approximately 3.875 percent.
Mortgage Insurance:
Both FHA and USDA loans charge a monthly mortgage insurance premium and an upfront mortgage premium at closing. However, USDA loans come with slightly lower premiums than FHA. The monthly mortgage insurance cost is about 0.85 percent of the loan amount for FHA home loans, and the rate is just 0.35% percent for USDA loans. This mortgage insurance is payable till the life of the loan. However, FHA can limit mortgage insurance payments to 11 years if you make at least a 10% down payment. FHA upfront mortgage insurance premium is 1.75 percent of the loan amount, whereas USDA upfront mortgage insurance premium equals 1 percent. In both cases, the borrower finances the upfront fees into their loan amount rather than paying in cash.
Credit Requirements:
FHA loans have a more lenient credit requirement than FHA loans. FHA only requires a credit score of 580 to get qualified for a home loan. And FHA also accepts a credit score of as low as 500 to 579 if you make a down payment of 10%. If you are a first-time buyer and do not have a credit score due to limited borrowing in the past, you can still avail of an FHA loan by showing a 12-month history of on-time rent payment. On the other hand, USDA has a higher threshold. To buy a house with a USDA mortgage, you’ll need a minimum credit score of 640.
Bottom line:
The above information can make it easier to narrow down your Texas home loan choice. However, the best Texas Mortgage loan option depends on your goals and needs.
